Centralization and Decentralization of Digital Currencies: A Comparative Analysis of CBDC, Bitcoin and Ether

Abstract

The evolution of the global digital financial system is generating two main forms of digital currencies: a centralized currency system, such as Central Bank Digital Currency (CBDC), and a decentralized cryptocurrency system, like Bitcoin and Ether. This study aims to analyze the conceptual differences between the centralized (CBDC) and decentralized (Bitcoin and Ether) models and each operating mechanism. The study also examines how both models impact the stability of the economy and adherence to Shariah principles. Using the qualitative approach and exploratory design, the study examines materials on CBDC, Bitcoin, and Ether. The study collects data from central bank reports, monetary policy documents, academic articles, and technical papers published by relevant institutions. The content analysis method should identify similarities and differences between the currencies in terms of system architecture, infrastructure, technological efficiency, energy, governance and compatibility with Shariah principles. According to the study, CBDC, Bitcoin and Ether represent three distinct paradigms: Bitcoin's decentralized system, through proof-of-work, produces rather limited functionality to emphasise individual freedom and privacy, while Ether innovates the system via a switch to proof-of-stake and smart contracts, which leads to greater functionality. CBDC, on the other hand, maintains a centralized system to ensure monetary stability, but with a compromise on users' privacy. Hence, while maintaining the value of blockchain transparency and traceability without sacrificing economic stability, the study proposes a hybrid approach in order to improve transaction efficiency. The study suggests implementing a regulatory sandbox involving authorities, economists and Shariah experts as an initial test measure of this innovation to ensure security for users and compliance with the principles of Shariah in the development of a healthier digital financial ecosystem.